Top Ten Rules to Trading Success

by PT Cheng

There is no doubt that stock trading is getting very popular nowadays and
it's the preferred vehicle for most people to make money. Almost every
household talks about it. Most of them enter the market now and then.

To be successful in the trading game, there are some rules to follow. By
violating the rules, you will definitely on the losing side of the game.

Regardless of all the trading books and newsletters that have cropped up,
all of the market gurus are sharing and following the same trading rules.
You can't live without them if you want to succeed in your trading.

Here are the rules to successful trading, in random order, and they apply
in all trading situations:

PLAN YOUR TRADE AND TRADE YOUR PLAN.

You must have a trading plan to
succeed. A trading plan should consist of a position, why you enter, stop
loss point, profit taking level, plus a sound money management strategy. A
good plan will remove all the emotions from your trades.

THE TREND IS YOUR FRIEND.

Do not buck the trend. When the market or
stock is bullish, go long. On the reverse, if the market is bearish, you
short. Never go against the trend.

FOCUS ON CAPITAL PRESERVATION.

The most important step that you must
take when you deal with your trading capital. You main goal is to preserve
the capital. Do not trade more than 10% of your portfolio in a single
trade. For example, if your portfolio is $10,000, every trade should limit
to $1000. If you don't do this, you'll be out of the market very soon.

KNOW WHEN TO CUT LOSS.

If a trade goes against you, sell it and let go.
Do not hold on to a bad trade hoping that the price will go up. Most
likely, you end up losing more money. Before you enter a trade, decide
your stop loss price, a price where you must sell when the trade turns
sour. It depends on your risk profile as of how much you should set for
the stop loss.

TAKE PROFIT WHEN THE TRADE IS GOOD.

Before entering a trade, decide how
much profit you are willing to take. When a trade turns out to be good,
take the profit. You can take profit all at one go, or take profit in
stages. When you've recovered your trading cost, you have nothing to lose.
Sit tight and watch the profit run.

BE EMOTIONLESS.

Two biggest emotions in trading: greed and fear. Do not
let greed and fear influence your trade. Trading is a mechanical process
and it's not for the emotional ones. As Dr. Alexander Elder said in his
book Trading For A Living, if you sit in front of a successful trader and
observe how he trades, you might not be able to tell whether he is making
or losing money. That's how emotionally stable a successful trader is.

DO NOT TRADE BASED ON A TIP FROM A FRIEND OR BROKER.

Trade only when
you have done your own research and analysis. Be an informed trader.

KEEP A TRADING JOURNAL.

When you buy a stock, write down the reasons
why you buy, and your feelings at that time. You do the same when you
sell. Analyze and write down the mistakes you've made, as well as things
that you've done right. By referring to your trading journal, you learn
from your past mistakes. Improve on your mistakes, keep learning and keep
improving.

WHEN IN DOUBT, STAY OUT.

When you have doubt and not sure where the
market or stock is going, stay on the sideline. Sometimes, doing nothing
is the best thing to do.

DO NOT OVERTRADE.

Ideally you should have 3-5 positions at a time. No
more than that. If you have too many positions, you tend to be out of
control and make emotional decisions when there is a change in market. Do
not trade for the sake of trading.

Above all the rules, there is one single most important element in trading
success: YOU. The markets have been the same and will always be the same.
You decide whether the trade is a success or failure. Losing is part of
the game. Don't give up and keep improving. Be disciplined, determined,
persistent, and most of all enjoy your trading.

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About the Author

PT Cheng is the owner of FinanciallyRich. Get excellent
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